The US central bank also always issues a written statement with the interest rate decision. “He again said in March that he thought interest rates needed to be raised further to keep inflation in check,” says De Jong. “That sentence was deleted and yesterday Powell said it was a substantial change. Right.’
However, Powell gave no guarantee that interest rates won’t rise in June. According to De Jong, he has wisely kept a low profile about it. “But the possibility that this was the last interest rate hike for now is quite high.”
Careless risk management
High interest rates have caused significant turmoil in the banking sector in recent months. A number of banks have even collapsed in part due to higher interest rates, such as Silicon Valley Bank and First Republic Bank. Last night it was announced that a much smaller bank, Pacific Western Bank, was also in trouble.
“The Fed thinks that these kinds of problems are ancillary and that they are the result of poor risk management by the banks involved,” explains De Jong. “I share this vision. We have to realize that these banks did not have a monopoly on unwise management of interest rate risk.’
According to De Jong, there is therefore a “pretty good” chance that even more of these small banks will run into problems. The risk for large institutions, on the other hand, is lower. ‘Because of all the problems, people have been looking very broadly into the banking sector to see if there are any large institutions with similar problems. Apparently he’s come to the conclusion that it’s not that bad.’
Too far
The Fed’s official interest rate is now between 5 and 5.25%. There is a feeling among some economists and investors that the central bank may have gone too far with interest rate hikes. “The effective yield on 10-year government bonds in America is currently 3.3 percent,” says De Jong. This is signaling to the market that they think the Fed has gone too far. Going too far means doing unnecessary damage to the economy.’
ECB
The European Central Bank will also announce today by how much interest rates will be raised. According to De Jong, the big question is whether it will be a quarter or a half percentage point. ‘On the one hand there are the ‘hawks’ who want to fight inflation vigorously and raise interest rates by half a percentage point. And on the other the ‘pigeons’. They will argue that interest rate hikes are having a lagged effect and that it is time to slow down.’
The ECB’s Bank Lending Survey, released earlier this week, shows that demand for credit from businesses and households has fallen sharply. This is grist for the pigeons inside the ECB. De Jong therefore expects that today they will pull the longest straw. “I expect a 25 basis point hike today.”